A Guide to Scoring

Next time you are at the checkout counter at Victoria’s Secret and the cashier asks if you would like 10% off your purchase by opening a credit card, STOP.  No, no, you can buy your bras and panties, but don’t sign up for the card. Why, you ask?  Unfortunately, common mistakes such as opening new credit can adversely affect your credit score.  I want to advise you how to minimize such errors and maximize your buying power. 

A credit report is a record of one’s past borrowing and repaying.  This information is recorded by three credit bureaus: Equifax, Experian, and TransUnion.  Your numerical credit scores are based on the reports.  FICO is the scoring system that all three of the major credit bureaus use.  FICO scores range from a low of 300 to a high of 850.   Lenders use credit scores as a predictor of likelihood of defaulting on loans.    Your credit score helps determine whether a lender is willing to extend you a particular loan and at what interest rate.  This can mean the difference of thousands of dollars when financing a big ticket item.  For example, two women borrow $250,000 for a mortgage.  The woman with good credit (Ms. G) gets a fixed 30 year loan at 6.5% and the woman with bad credit (Ms. B) gets the loan at 7.5%.  Ms. G will save $228,000 in interest over the next 30 years.  That’s a lot of dough! 

First Step: Obtain Credit Reports and Scores Annually Get a free copy of your credit report annually from each of the three credit bureaus at www.annualcreditreport.com.  Next, purchase your credit scores for each of your reports at the credit bureaus’ websites for about $15.  

Second Step: Fix Any Errors on Your Credit Report When you deal with either the credit bureau or an actual lender, make notes of your conversations.  Take down names and extensions.  Bureaus are required by law to respond to a request to fix a credit error within 30 days. 

1.     Have accounts removed if they aren’t yours.  Call the bureau and explain that you need more information because you don’t recognize the creditor.  If the creditor made a mistake, call or write the creditor to get them to correct the erroneous information that they sent the credit bureau. 

2.     Have late or missed payments more than seven years old removed. 

3.     Have a bankruptcy more than ten years old removed. 

4.     Provide a 100 word or less explanation for a minor credit infraction that is accurate but was the result of extenuating circumstances to be placed on your file.  

Third Step: Play by FICO’s Rules and Maximize Your Credit Score Your score is based on the following: Payment history (35%), Length of credit history (15%), Amount of new credit (10%), Types of credit used (10%), Amount of debt (30%). Following the guidelines below will keep you in FICO’s good graces. 

1.      Pay your bills on time.  

2.     Be loyal if it doesn’t cost you.  The older the age of the loan accounts you have open, the better.  Closing old accounts and opening new ones generally lowers your credit score.   

3.     Minimize new credit card applications and debt accounts.   

4.     Pay down consumer debt.  The higher your consumer loan balances, the lower your score. 

Follow these steps and you will be well on your way to good credit.  Who knew buying a thong could hurt your credit score?

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Why Your AMEX Is Dinging Your Credit Score

As I teach in my Financial Health 101 Seminar, one determinant of your credit score is how much of your credit you are using or your “credit utilization”.  The simplest example would be you only have one credit account, a Visa with a $10,000 maximum, and you carry a $1,000 balance.  This would be 10% credit utilization.  Pretty straightforward, right? Not always.  Many people carry charge cards that do not have a pre-set spending limit and these can hurt your credit score.

During a break at a recent seminar at a law firm in Manhattan, an attorney asked me how his no limit American Express would affect his credit score.  Because his American Express has no pre-defined spending limit, how did American Express report his credit usage to the credit bureaus?  The answer is, charge cards report the highest amount ever charged monthly on the card to the credit bureaus as your credit limit.  This typically results in a high credit utilization, effectively lowering your credit score.  For example, if the most you have ever charged on your AMEX in a month is $2,000 and you typically carry a $1,000 balance this is a 50% credit utilization.  Compare this to your 10% utilization on the VISA with a $10,000 limit.

Moral of the story, charge cards are detrimental to your credit score!